How should eagle charge customers for usage

Reference no: EM133608531

Case:

The Eagle Company's quality control service recently purchased a piece of testing equipment that detects potential issues in production. It intends to offer this machine to be used by external customers only. The machine's useful life is 1 year, and its capacity is 400 tests; its fixed cost (including acquisition cost) is $1,000,000; its variable cost is $5,000 per test. Three businesses have expressed interest in using this machine. Combined, these three customers plan to conduct 200 tests. Eagle expects to charge a 10% margin on its "reasonable" cost of serving these customers but is struggling to determine what constitutes a "reasonable" cost.

The actual number of parts sold in 2023 is 1,250,000 and 200,000 for the civilian business and government business, respectively. The below exhibit provides data on budgeted and actual direct materials costs in 2023.

Exhibit 1: Budgeted and Actual Direct Materials Usage in 2023

	Budgeted		Actual
	Price per lb	DM Dollars	Price per lb	DM Dollars
Civilian	200	400,000,000	150	750,000,000
Government	400	200,000,000	500	180,000,000
Total		600,000,000		930,000,000

Question 1: Suppose no competitor offers similar tests. How should Eagle charge customers for usage? Be specific in your answer using data provided by the case. Explain your answer.

Question 2: How would the above answer change if competitors offer similar tests? What is the minimum that Eagle can charge and be no worse off? (No calculation is needed for this question.)

Question 3: Based on the answer to question 2, how many tests does Eagle have to complete to ensure it breaks even on the new equipment?

Question 4: Eagle is considering reorganizing its machine setup operation into a separate unit and letting it charge the civilian-focused business and the government-focused business. The capacity for the machine setup operation is 120,000 setups a year. What should be the transfer price so that the civilian-focused business and the government-focused business can make their own decisions? Explain.

Reference no: EM133608531

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